INTERNATIONAL BUSINESS; Bit of Teamwork Behind Ousters at Exchange

By HEATHER TIMMONS and CARTER DOUGHERTY; Heather Timmons reported from London for this article and Carter Dougherty from Frankfurt.

Published: May 11, 2005

Aggressive, fast-moving hedge funds and their more sedate but larger peers, the traditional mutual and pension funds, are usually in opposite camps when it comes to investing styles.

But the two sides quietly worked together recently to land an unprecedented one-two punch that resulted in the removal of Deutsche B?'s management. The exchange's top two executives resigned on Monday.

''We were more vocal'' about the need for management change than the traditional funds, said David Slager, a fund manager with Atticus Capital, a hedge fund with $6 billion under management that was one of the top agitators for change at the Deutsche B?. But without the traditional funds, ''it would not have happened,'' he said.

Investors and academics say that more teamwork of this type is possible as a growing pile of cash at hedge funds increasingly flows into stocks while traditional fund managers, pressed to increase returns, rely on shareholder activism to raise stock prices.

The combination has its appeal, corporate governance specialists say. Hedge funds, which generally have no qualms about making their complaints public, could provide the mouthpiece, alerting company managers of changes the funds would like to see. The largest traditional funds, which are loath to speak publicly, can quietly back up these requests, using as leverage the huge stakes they often hold.

''There is a commonality of interest between traditional investors and some alternative investors'' because both are looking for better returns, said Robert Talbut, chief investment officer at Royal London Asset Management. So far, the two types of shareholders have rarely overlapped, but that may change, Mr. Talbut said.

Traditional funds have been privately agitating companies to improve their corporate governance for some time, he said, ''but there is a growing recognition that if doing it in private doesn't work, doing it in public is another tool in the toolbox.''

Any cooperation between hedge funds and institutional investors would have to be strictly informal. Securities regulators in Europe require shareholders to disclose their plans to buy or sell stakes in a public company, or how they plan to vote at shareholder meetings.

But the sort of unofficial cooperation that led to the ouster of Deutsche B?'s top managers is not likely to raise legal issues, securities lawyers said.

The chief executive, Werner G. Seifert, whom many regard as a brilliant strategist but arrogant, alienated the company's long-term shareholders with his two bids for the London Stock Exchange. These investors, unaccustomed to taking public positions on contentious issues, effectively deferred to Christopher Hohn, the manager of the TCI hedge fund, who was willing to make a point publicly. He and other hedge fund managers moved from pushing the company to drop its bid to agitating for the ouster of the board, which led Mr. Seifert and the chairman, Rolf-E. Breuer, to step down.

The hedge funds did not do it alone, though. ''The hedge funds couldn't have pushed as much as they did'' unless they thought the traditional funds had harbored similar concerns, said one executive from an institutional investor with a large Deutsche B? stake.

By Thursday of last week, Mr. Breuer understood that long-term investors like Capital, Fidelity and Merrill Lynch wanted significant change, according to a person close to him. Mr. Seifert, Mr. Breuer told the long-term shareholders, might be prevailed upon to leave immediately; Mr. Breuer also offered to resign but to stay on till the end of the year to find several new board members, the person said. Hearing a generally positive response to this proposal, Mr. Breuer then had an unproductive meeting Friday with Mr. Hohn of TCI, who had been publicly agitating for change on the board since March.

Mr. Slager said the hedge fund actions that led to the Deutsche B? shake-up are not the ''normal pattern of behavior'' for most hedge funds, which generally prefer to let their investments quietly mature.